Fuels America call considers likely impacts of leaked RFS draft

A teleconference hosted by Fuels America on Nov. 6 explored the likely impacts of the U.S. EPA’s leaked draft proposal for the 2014 renewable fuel standard (RFS) renewable volume obligations (RVO). Speakers stressed the negative impacts would be felt by not only first- and second-generation biofuel producers, but by U.S. consumers as well. Big Oil, however, would realize large financial gains.

If officially published as a proposed rule, the leaked draft would set the 2014 cellulosic RVO at 23 million gallons, on an ethanol equivalent basis; the advanced biofuel RVO at 2.21 billion ethanol-equivalent gallons; the biomass-based diesel RVO at 1.28 billion gallons, and the renewable fuel RVO at 15.1 billion ethanol equivalent gallons. The resulting 2014 requirements would be far below those set by RFS statute.

Geoff Cooper, vice president for research at the Renewable Fuels Association, opened the call by noting the law establishing the RFS calls for the total RVO to be set at 18.15 billion gallons in 2014. While the EPA has reduced the cellulosic RVO in the past, the leaked proposal would be the first time across-the-board cuts were made to the statutory volume requirements.

According to Cooper, the EPA is reportedly considering these cuts because of the so-called E10 blend wall and the false notion that the infrastructure and vehicles needed to meet the 2014 statutory requirements don’t exist. He stressed, however, that RFS regulation only grants EPA the authority to alter waive statutory volumes under certain conditions—and the blend wall is not among them.

“The law does not allow the EPA to exercise its general waiver authority based on the assumption or the idea that infrastructure constraints will limit renewable fuel consumption,” said Cooper. “Rather, that waiver authority that is in the statute is limited to cases where there is inadequate domestic supply of renewable fuels to meet the requirement. I will tell you that inadequate domestic supply is not going to be a problem for us next year. The law calls for 14.4 billion gallons next year, and the existing corn ethanol industry has the nameplate capacity to produce about 14.8 billion gallons and the physical capacity to produce well over 15 billion [gallons].”

The RFA has analyzed what the leaked proposal would mean in financial terms. According to the organization, reducing the renewable fuel RVO by 1.22 to 1.04 billion gallons would reduce ethanol production and decrease refiner and blender purchases of ethanol by $2.1-$3.6 billion. At the same time, refiners would increase the production and sale of gasoline to fill the void, bringing in an additional $2.3-$4 billion in revenue. Replacing a portion of ethanol with gasoline would also increase gas prices, resulting consumers spending an additional $6.8-$11.3 billion on gasoline in 2014.

Cooper estimated the gross financial impact of the RVO cuts would be $9-$15 billion for the oil industry. There would also be impacts to infrastructure development. “If EPA were to lower the RVOs for 2014, it would send a very clear signal to the oil industry and their partners, their marketers and retail partners, that we don’t need to invest in E85 infrastructure or E15 infrastructure,” Cooper said. “We continue to believe there is enough infrastructure in place today to distribute that 14.4 billion gallons in 2014, but what would very likely happen if EPA held the line on that number, it would see investments in infrastructure that is going to be needed to meet the RFS targets beyond 2014.”

Chris Standlee, executive vice president of Abengoa Bioenergy, spoke about the impact the leaked proposal could have on his company and the renewable fuels sector as a whole. We believe the leaked proposal could effectively chill any future investment in advanced biofuels, he said.

According to Standlee, first generation fuel producers—such as Abengoa—are among those making huge investments in second generation fuels. In fact, first-generation producers are the logical first adopters of second-generation technologies, he added, noting that these companies already have existing plants, infrastructure, and relationships with farmers. Those who have invested in first-generation projects are likely investors in second-generation plants, he stressed.

If the leaked proposal turns out to be accurate, it will send a “clear message of policy reversal,” one that would send a chill into the investment community, Standlee said. “The impact of this leaked draft was immediate, as publically traded biofuel producers saw their stock prices drop,” he continued, noting that analysts at the same time raised the outlook of the refining sector.

“Investors have already started to back away from any further investment in advanced renewable fuels, and companies that make those fuels are already thinking about moving those investments overseas to a more receptive market…costing the U.S. significant potential jobs and major investment,” Standlee said.

With regard to Abengoa’s investments in the biofuel sector, Standlee noted that his company has built three large conventional ethanol plants in the U.S. since 2005. “Those are expensive plants. We’ve invested hundreds of millions of dollars in doing that here in the U.S., and that’s just here in the U.S.,” he said. “By reducing the ability to blend conventional biofuels, even if there is still a focus on second generation or advanced biofuels, basically the EPA would be asking us to strand our existing investments in order to invest in new second generation assets that…may or may not be supported by this policy in the future. It just sends such an inconsistent message of policy support that it calls into question any kind of future policy. What that does for Abengoa, frankly, is it requires us to reevaluate and change the way we consider our future investments. We are looking very heavily at Brazil…I think the United States could potentially lose a lot by taking a step like this.”

Jan Koninckx, global business director for biorefineries at DuPont, also weighed in on the leaked proposal during the call. ”We’re very concerned about the RVO numbers that have been leaked…It’s a reversal,” he said. “It is something that very much surprises and disappoints us, and it’s something that will rob the country of a great opportunity.”

During his presentation, Koninckx spoke about DuPont’s experience in commercializing new technologies, and stressed that cellulosic ethanol technology is commercially viable. While the tactic of the incumbent oil companies is to create doubt in the biofuels sector, Koninckx said the industry will prevail and will be commercialized. What those tactics might do, he said, is slow the industry down and cause leadership in the industry to shift away from the U.S to other areas of the world.

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